Wednesday, January 18, 2012

Millionaires portfolio – part 2

In October 2011 blog, I had recommended 5 stocks at the prices prevailing then -  all the five stocks (SBI, BHEL, Bajaj Auto, Esab Industries and Maharashtra seamless) are still hovering in the same range today and are still worth buying.

The methodology used for stock valuation is given in detail in my Sept 2010 blog - you can go back and look at it, if you wish. It is based on based on the historical earning per share growth rate (EPS CAGR) and the price earnings multiples (PE) for the company (over the past ten years) – using this past data, we can forecast the future stock prices beyond five years with a very high degree of certainty - especially for select companies that have an identifiable durable competitive advantage that cannot go away easily in the future decade.

Warren Buffet and Peter Lynch are known to follow these principles in stock picking - these are simple and straightforward methods and taught in MBA schools all over the world – the mistake that everyone makes is that they want quick results. For example mutual fund managers are measured by the investors based on their daily NAV - the fund manager has to make sure that he is giving at least as good returns as his competitors “on a daily basis” –he cannot think five years. Individual retail investors look at one year timelines for all investments as most of us have a tendency to slice our lives in yearly intervals. However, if we start looking at 5 years for equity, then there is a good chance of making good returns provided you follow some proven equity valuation and forecasting method.

So here are five more stocks that I recommend at the prices mentioned - all these stocks I have personally invested in the past 2 months and my analysis tells me that they will grow at 20% plus CAGR over 5 years:

  1. COLGATE – all of us know this company - this stock is currently quoting at around 960 – I recommend this stock at even a price up to 1000 – the company has shown an EPS growth of 21.5% over the past 10 years. Looking at the performance of the company and the stock movements for the past few years - it is a good buy at this price and should give a 18-20% growth per annum over the next 5 years.
  2. DABUR – this is another company known to all of us - this stock is currently quoting at around 97 – this company has shown an EPS growth rate of 24.7% in the past 10 years –at the current price of 97, it is expected to give a return of 18-20% per annum over the next 5 years – this surely is a buy at prices below 100.
  3. Havells India – I am not sure if you know what they make –they are a large player in the industrial and residential electrical equipments space – they own well known brands like Sylvania, Crabtree and Standard – they make domestic appliances like irons, geysers, fans and motors , modular switches,  circuit protection components and cables and wires – the company has shown an EPS growth rate of 45% in the past 10 years – this stock is quoting at 434 now – if you get this at any price below 385 – buy it. Every stock goes up and down based on market sentiments and I do expect the stock to touch 385 at least once in the next 2 months.
  4. TCS – TCS is a juggernaut that has enough momentum to take care of most external shocks – outsourcing and offshoring as a concept are here to stay and the more the pressures on the US and EU companies to cut costs, the more the opportunities for TCS – the company has shown better growth in EU this qtr than the US and the INR depreciation will make the company more profitable as it earns in USD and spends in INR – for the past 6 years, it has had an EPS growth rate of 26.65%  -I recommend this stock at any price till 1125 – currently it is quoting at 1067
  5. Voltas – This company is quoting at 94 currently – I recommend this at any price till 100 – with a 10  year EPS growth rate of 38%, it surely is going to give a 5 year return of 20% plus.

 As always I want to put the rider that these are my recommendations -I have invested in these stocks in the prices mentioned above– it will do well for you to look at these stocks and read about these companies. After all it is your hard earned money – your risk and your reward.

As Peter Lynch puts it -“Spend at least as much time researching a stock as you would choosing a refrigerator."
Not that you chose a refrigerator every now and then :-)

Happy Investing.